CHICAGO: The recent sustained price strength in corn has occurred amid intensifying concern about how this season's stretch of hot and dry weather across the Midwest has caused widespread damage to the emerging crop, and has given the impression of bullish buying interest flowing into this arena.
But most of the trading action seen has actually been traders exiting short positions rather than establishing long exposure, leaving this market in dire need of fresh bullish buying interest if it is to extend its recent gains.
While the recent price surge in corn — up 30 percent since mid-June and 18 percent over the past seven trading days — may give the impression of an expanding market, total corn futures open interest has actually been steadily declining in recent weeks, and recently shrank to its lowest level since early 2010.
Since mid-June — as December corn prices rallied by a third to their highest level since September — corn market open interest has shrunk by 10 percent, or 116,000 contracts (580 million bushels).
This positional reduction reveals that, rather than being caused by a swell in fresh trader buying interest, the recent spell of price strength has in large part been driven by a market exodus as short-biased traders unwound that exposure.
Specifically, it appears that a majority of the short-covering action was undertaken by speculative entities, as the decline in the collective speculative short position in corn futures and options since mid-June accounts for roughly 75 percent of the total decline in open positions in corn over that period.
But certain traders also reduced long-sided positions in corn as well, revealing a general tendency to pare back market exposure to corn in recent weeks even as the crop-threatening weather has rendered the corn arena a potentially compelling destination for fast-money traders looking to take a punt on a possible shortage of the crop come harvest.
The key question facing corn market participants going forward is will the recent spell of speculator short-covering evolve into long accumulation by those same traders as bullish enthusiasm stemming from deteriorating crop conditions gathers steam?
The recent stretch of short-covering by noncommercial, nonreportable as well as commodity index traders in the corn market has amounted to close to 450 million bushels worth of combined buying, which as noted above accounted for a majority of the 580-million bushel decline in overall corn open interest seen since mid-June.
But considering that this year's US corn crop is expected to exceed 12.5 billion bushels even after a hugely disappointing growing season, 500 million or so bushels of buying is not an especially large amount.
And as can be seen below, the current net positions of most speculative traders have room to grow from current levels should those traders maintain their recent aggressive buying momentum.
That said, as well publicized as the corn crop's problems have been, the economic woes of the euro zone have captured even more headlines, as have the problem areas of the Chinese and the US economies, in recent weeks.
These “macro” level concerns are casting clouds over nearly all market sectors, including commodities, which rely on healthy levels of international trade in order to maintain rising price biases.
Further, credit availability has been impacted for many trading outfits, especially those with ties to Europe-based banks that are in the midst of a financial credit freeze as a standoff over bailouts and austerity in the region persists.
This contraction in credit — as well as in confidence of overall global economic health — has hampered bullish enthusiasm in many commodities markets lately, and is one of the chief reasons why overall large speculator positions declined in corn and other markets in recent weeks.
Should concerns over global economic health build further in the weeks ahead, a slowdown in overall trader activity could be seen, even if corn's supply story continues to be fed fresh bullish news.
This could serve to keep the recent buying interest confined to short-covering and limit the amount of fresh long accumulation materializing in the market.
And that could potentially be a bearish development, as once the final short-covering transactions are complete prices will struggle to maintain a rising trajectory unless fresh buying interest can be enticed into the arena.
— Gavin Maguire is a Reuters market analyst. The views expressed are his own.
Corn rally needs fresh bull interest
